World's Best-Run Pension Funds Say It's Time to Start Worrying | Hacker News Reader

World's Best-Run Pension Funds Say It's Time to Start Worrying

bloomberg.com

166 pointskungfudoi164 comments

The fundamental issue is that saving financial assets today has essentially zero impact on the total consumption of future retirees. Instead, what matters is 1) the amount of real goods and services future workers generate, 2) how much of this production they give up in tax transfers to retirees or sold for financial assets owned by retirees, and 3) how many workers there are per retiree.

As a society, we cannot collectively save our way out of the coming pension crisis. Already economic growth is basically not capital-constrained - if an extra billion dollars starts sloshing around the system, it simply raises the market capitalization of existing bonds, businesses, and real estate by a billion dollars. Public companies, on net, return cash each year to investors. Saving doesn't make future retirees as a class wealthier, it simply rearranges the rank ordering of future retiree wealth while allowing current retirees to spend more via higher asset prices.

So, what can future retirees collectively do? Have more children, allow more immigrant workers, increase future tax transfers, force higher savings rates on future workers (eg, student loan debt, mortgage repayments, land rents), retire later, or accept a lower standard of living. What individual options are there? Basically all you can do is save more and wind up in a more privileged tranche of future retirees, and hope that society winds up rich enough to support your retirement dreams. There's some room for optimizing your investment strategy so that it minimizes costs and risks, via tax-advantaged accounts owning broad-market index funds, but there's only so much juice to squeeze there.

> Already economic growth is basically not capital-constrained

I really disagree with this. Consider a simple counter-example. Workers in the Bay Area are substantially more productive than the American average.

One simple way to use capital to increase GDP is to build more housing and infrastructure in places like the Bay Area. Even if the population doesn't grow, that housing stock will allow future workers to move from West Virginia to San Francisco.

By shifting future workers from low-productivity job markets to high-productivity job markets, we can substantially increase total economic. Even with the same population and the same technology base. The only constraint is the tight housing supply in places like the Bay Area. But we know how to build more housing, all it takes is a willing political system and capital investment.

The housing supply in the Bay Area is politically constrained, not capital-constrained. It does not matter how much money you have; if you want to build in the Bay Area, you need to convince the local NIMBYs to allow you to do so.

It is geograpically constrainted and cannot build new single detacted. Building up changes the character and no one mentions earth quake issud and the lack of supertall building found commonly elsewhere.

Earthquake safety has only a minor impact on building construction costs. If you put aside land and permit costs, constructing a building in the Bay Area costs about the same as other major metropolitan areas.

" cannot build new single detacted"

so... don't? Plenty of other types of home.

(Nevermind that we're accepting the idea we don't have room at face value)

There's certain economic laws you can't get around even with capital expenditure. Diminishing marginal returns, political and social capital, etc.

In fact, trying to increase capital expenditure to achieve future income gains actually faces an anti-intuitive danger: most capital expenditure creates future depreciation/maintenance/ opportunity costs. So if you mis-allocate big chunks of capital expenditure (and centrally driven political decisions such as this have a high risk of that happening compared to decentralised/incremental/market decisions) your apparent fix can actually make the situation worse, as your big chunks of capital create future maintenance and depreciation and political liabilities which create (political) pressure for further draws on the future tax base.

There's a strong argument that various forms of past infrastructure spending that now require upkeep the local population can't afford (various road infrastructure in local municipalities) and rust belts are literally that.

Also, if the form of capital expenditure focuses on environmental resource consumption or uncosted externalaties, some forms of capital expenditure can be thought of as transferring future consumption into the present.

And then I haven't even touched upon whether the capital expenditure/expansion is funded via debt...

You never hear discussions about maintenance costs of infrastructure. I wonder what the math looks like for a given bridge/road

What makes me somewhat mad are the (Western) countries "solving" their public pension problems through immigration. Not only do you then destroy the tax payer base in the country that loses the emigrant, but you're just pushing the problem down the line so that the immigrants that saved you tomorrow, are themselves screwed when/if they ever get to retire.

It's literally a legal Ponzi scheme and in many cases, you are legally obliged to play.

I'm looking at you Canada.

Yeah the new push is to drive our population to 100M in 80 years from about 37M now. It costs $2300/mo in our biggest cities for a single bedroom apartment on average.

A lot of this is the rush of foreign investment and the government you elect caring more about the tax revenue from people who don't even live in your country over the welfare of their own constituents.

Agreed, however it's also a result of overly strict building and zoning codes that don't allow density to increase in exchange for a reasonable price.

The result, however, is tragic. People just live in "illegal" housing situations like stuffing 4 or 5 people into a 1 bedroom or 2 bedroom apartment, where people just create temporary walls to zone off part of the living room or use an extra large closet for extra "bedrooms".

Thus the city loses out on tax revenue AND preventing population increase in certain areas, which is the whole point of these restrictive zoning laws.

You are not the first person I have seen conflate those two things. I assume you’re assuming higher demand and fixed supply leading to rising prices, is that fair? If so, what is your mental model for the how/where/why of house construction?

It's more difficult to build a third floor than a first floor, to build a subway for three instead of a street for one, to install three sewer pipes instead of one, to police three rowdies instead of one. NIMBY laws redistribute those costs to commuter neighborhoods, but the crowding raises prices via simple increasing marginal costs. That's my model (I'm not the OP).

On the other hand, three cities cost three times as much as one city. Or have I missed something?

Yes, because it's not more difficult to build a third city than a first city. It's equally difficult. So there are not diminishing returns like the ones I described in my post. Although it's hard to get over the hump of the first city's network effects and get started.

You need a high birth rate or high immigration rate to grow economies. You are right everybody should be screwed; you need more people.

That is ignoring real gdp growth rate per capita [0].

[0]: https://fred.stlouisfed.org/series/A939RX0Q048SBEA

Canada is known for a large amount of high skill immigration that benefits almost everybody. It’s nice having educated people around and we have access to the best food in the world because everyone brings it with them

I'm not sure about the whole data around it, there will certainly still be positive effects for the countries these people are migrating from. But generally, only accepting high skilled immigrants is very nice for Canada, but leads to pretty serious consequences for the emigration countries (brain drain).

The brain pools are much bigger than you imagine.

We are also more productive as a society compared to the 50-60 years ago that retirees were born. Theoretically we should be able to make more with less people too.

Productivity gains certainly help, but it's not something that pension plans have any control over. They can only estimate what it's going to be going forward, and try to hedge their defined-benefit terms around it. Defined-contribution plans have a much better time, since they can foist this risk onto future retirees.

There might be others, but I recall 2 styles of pension setup. One we use in Australia is that workers set aside x% of their wages into a fund where they can't access the money until they have retired at >60 years old.

The other is a transfer-payment from current workers to retired workers.

In the second case what you say is true; pension funds would be basically a thin abstraction for what is basically a welfare system. People's benefits are not linked to their productivity and life choices. Pension funds would have no power.

However in the Australian system the funds have enormous power because they sit on a vast pool of capital they have exclusive control over. They have the means and power to start their own business/create demand for new businesses that meet their retirees potential needs. This shows there is no theoretical reason why pension funds can't actively participate in shaping the economy to meet future retirees needs.

But your main point goes to the fact that 'investment' is typically in pieces of paper rather than real things. This is probably a result of government policy favouring people who own financial assets over real assets. Governments have been running a 'war on investment' for many years; look at how well companies like Uber do that take capital and basically burn it. How is a productive company supposed to compete with that sort of business plan? There is far too much credit in the system and that is a direct result of government policies or situations quietly accepted by government policy. All those resources could have gone into things that retirees were going to use.

If a company losing billions can make its owners billions; there is no particular incentive to do the legwork to actually think about the future and come up with a plan that works. We are starting to see the results of that thinking, which is pervasive, in the pension funds.

Addition For Clarity; real investment is supposed to be about making it much cheaper and easier to secure useful resources in the future. If there are broad scale pension crises, which there are, then whatever has been going on isn't real investment. It was a likely outcome of the '08 crisis that real investment would be squelched; because people who were exposed as not stewarding money sensibly were left in charge. I'll bet the Europeans are in a worse spot than the Americans and doing something foolish like following their financial lead but with a more extensive welfare state.

The first style of pension setup is also a thin abstraction over a welfare system. The only difference is that instead of taxation, it uses savings to inflate asset prices to generate additional retiree consumption at the expense of current worker consumption.

>But your main point goes to the fact that 'investment' is typically in pieces of paper rather than real things.

Investment in tangible things also is typically in the form of pieces of paper allocating economic rights. Real estate and corporations are investing in titles and shares, respectively. Extra money doesn't generate any more land or any additional business ideas, it simply bids up the prices of what's out there.

>If a company losing billions can make its owners billions; there is no particular incentive to do the legwork to actually think about the future and come up with a plan that works. We are starting to see the results of that thinking, which is pervasive, in the pension funds.

I'd characterize it more that simply adding more money to the system does not materially increase the pool of useful ideas and innovation out there. I know that I couldn't come up with any better of a business plan if I was handed a hundred million dollars rather than a million, and anyone I hire to do so would just be a zero-sum activity that reallocates who owns their resultant plans.

More investment leads to higher asset prices, lower interest rates, business growth and more future production. Investing in capital markets just gets the market to allocate your capital, as opposed to if you built a widget factory yourself instead. The end result is the same (but the market is probably more efficient), more production.

This comment nicely explains the concept of the "veil of money": viewing economic activity in terms of real products and services instead of money can clarify what's actually happening in the economy.

but you'd expect that technological advances to prop up the implied drop in worker productivity (which is why there's an implied scarcity of goods and services in the future).

What i know for sure though, is that a large number of future retirees hav not have saved up enough for themselves.

Retirees as a group cannot save their way out of the pension crisis - an extra TV made in 1998 does not materially impact the ability of society to provide health care to a retiree in 2018. You'd have to physically store goods for later consumption for this to work at all. All you get out of extra saving today is higher asset prices, allowing current retirees to consume the extra goods that current workers neglect to consume via saving.

> 3) how many workers there are per retiree

Rather, total production of workers per retiree. More kids from economically unproductive population segments, and more immigrants to unproductive population segments don't help future retirees.

It seems likely to me that political change is the mostly likely result from a future pension crisis: another government expansion of responsibilities for old age income and health care.

> The warning comes as pension firms across Europe struggle to generate the returns they need to cover their growing obligations. In Denmark, some funds saddled with legacy policies guaranteeing returns as high as 4.5% have had to use equity to meet their obligations.

Using equity to meet current obligations sounds a lot like a Ponzi scheme:

> A Ponzi scheme ... is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.[2] The scheme leads victims to believe that profits are coming from product sales or other means, and they remain unaware that other investors are the source of funds.

https://en.wikipedia.org/wiki/Ponzi_scheme

Provided that the equity drain is limited in scope, a pension fund can continue to fight another year.

The more interesting (or scary) question is what happens when tapping into the equity becomes the norm? At what point does the fund manager level with pensioners and inform them that the fund is in fact insolvent?

When interest rates are negative, there is no other option than to fund current obligations from equity. You can't do it from interest, because there isn't any.

Depending on the fund, there may in fact be another option: more risky assets. As noted in the article:

> In the meantime, pension funds have been coping by buying up riskier assets. The Dutch, ranked with Denmark as the world’s best performing pension providers by Mercer, have complained to the European Central Bank about the fallout on the industry.

And this is where things start to go off script pretty quickly.

And, yet, somehow, I’m expected to fund my own retirement, and these “riskier” investments are literally the only way I can accumulate enough to do so. I know this is about European pension funds, but the US has been “off script” for some time.

> Depending on the fund, there may in fact be another option: more risky assets.

Everybody knows the ECB will take some "risky assets" either as collateral or by outright buying it as soon as markets begin to crack. This whole article is just a rant for the public. Behind the scenes some traditional risky assets such as index funds are already on par with mortgage backed securities in terms of risk and will be accepted as collateral by the central banks.

> And this is where things start to go off script pretty quickly.

There are serious finance people (Mosler) who think this is nothing new and we've been doing "Modern Monetary Theory" in disguise for decades now. It's hard to tell for sure since most of the relevant information is not public, but almost everything makes sense if that's the case. It looks like new finance textbooks are being rewritten now with both QE and MMT mentioned with no references to them being measures of last resort, obscure or unusual. I don't know where this is coming from but it's speculated this is an attempt at normalisation of the current policies and MMT.

> Behind the scenes some traditional risky assets such as index funds are already on par with mortgage backed securities in terms of risk and will be accepted as collateral by the central banks.

Can you explain this in a bit more detail? What are some index funds are on par with mortgage backed securities and in what way is the level of risk similar?

The risk is similar because the too-big-to-fail phenomenon applies to both. Back in 2009 the central banks stepped in and bought any MBS for sale at pre-crisis market price, still on their balance sheets to this day. They couldn't let MBS fail because it was used as collateral in all kinds of loans. Now we see the same with stocks, so we know what to expect, thus the risk is similar.

The central bank of Japan is already openly buying ETFs (stocks) along with many sovereign funds around the world, giving ETFs further credibility as collateral between central banks and governments. ECB and the Fed are following their steps, even though they haven't done public purchases yet. All central banks are singling that buying stocks is on the table, there is no question it will be done in case of emergency.

I agree that quasi-equity purchases will be on the table. ETFs have different voting rights than direct stock. Governments won’t let these pensions fail in mass. Also look at dual interest rate options like teltros in the ECB.

Looking forward to what it looks like when Central Banks throw their hands up and start funding startups with printed money.

Meh, already done - the Softbank fund is pretty much owned by BoJ.

Isn't it irresponsible considering that they have a central bank, so they can raise rates? Otherwise it seems like an intentionally risky ponzi. (Pensions are a Ponzi scheme by definition - but one that is (presumably (ha) ) ran responsibly)

> You can't do it from interest, because there isn't any.

Unless you actually earn returns from the assets that the pension fund holds:

* https://en.wikipedia.org/wiki/CPP_Investment_Board#Investmen...

Not sure why you were downvoted as technically you're not that far from the truth. Most pensions do work this way, next one pays the previous ones.

For example in Finland the pension funds were started with the employees back then paying 1,5% of their salary to get pension. These days the rate is ~24% from salary, yet the gains are the same as those with 1,5%.

The risk is that current payers won't get their pension if there's no one in the future funding the system. Personally, I think it's very likely that the current payers are getting screwed in the end (by getting their pension cut and those who never payed will keep receiving theirs until they die).

which one a state pension or a private pension provided by your employer.

Unless you're burying canned food, there's very little time-transfer of real goods and services involved in pension schemes. Current production is current consumption. If current retirees didn't pay "enough" into the pension system, the people getting screwed by that are past pensioners, who did not get the level of consumption that economic conditions warranted.

It's MUCH worse than that.

PFs and insurers are going down the credit ladder, taking worse and worse credit quality in order to get SOME yield.

Thanks to QE concocted by MSEs (mainstream economists).

Don't even talk about China.

When this bubble finally bursts, it will be so bad we will look back with fondness on 2008. Kind of like we look back today on 1987 and think what was that kerfuffle all about.

There was a funny line in All About Mary: Each year is better than the next. As long as economists are still in power, each bubble is cuter than the next.

> Kind of like we look back today on 1987 and think what was that kerfuffle all about.

Do we? The 1987 crash was the second worst market crash in history follow the great depression. Or at least that's what I thought? In terms of adjusted dollars was it not worse than the dot com crash and the 2008 crash?

I'm not sure the 87 stock correction was worse than the recession preceeding it in the early 80s.

> Kind of like we look back today on 1987 and think what was that kerfuffle all about.

Between January and December 1987 the S&P500 had a positive return. [0] Yes, there was a big crash in the middle, but if you were not over leveraged and didn't look at your investments except in January/December, this was a year of very ordinary returns.

Certainly no biggy for long-term, pension fund type investments.

[0] http://futures.tradingcharts.com/historical/SP/1987/0/contin...

In some sense, isn't this inherently how something like a pension fund works?

Forget about the layers of obfuscation, and think about how the economy works. Some people work and produce stuff, some people do not. The norm (and a defensible one, IMO) is that young people work, and old people do not. This means that some of the output of the work that young people do has to be funneled to old people.

You can do that by building up vast stores of wealth and funneling it to people over time, or you can do it by directly taxing current production, but either way the effect is to direct resources from people who produce to those who don't.

Theoretically, we take the store of wealth approach, but in actuality that store of wealth depends greatly on the economy backing it to be sufficiently productive that there are enough resources to go around. The pension funds don't control the entire economy obviously, so they have to predict as best as they can. It seems extreme to call it a Ponzi scheme unless there was actual fraud occurring.

Edit: thrustvectoring[1] probably does a better job making the point I'm trying to make (or at least a related one.)

[1]: https://news.ycombinator.com/item?id=21174917

> Some people work and produce stuff, some people do not.

And some other people print money, whose value should be tied somewhat to the stuff that some people did or will certainly produce, but now most often does not.

>You can do that by building up vast stores of wealth and funneling it to people over time, or you can do it by directly taxing current production, but either way the effect is to direct resources from people who produce to those who don't.

The "vast stores of wealth" approach is "hoard financial assets, and then sell them to current workers" - that is, savings. Note that this includes financial assets such as mortgages and student loans, and "selling them to current workers" includes them paying down the principal.

I don't view it as a Ponzi scheme, per se, but there's a very big problem with defined-benefit schemes: if our future society is not productive enough to support the promised benefits, the only choices are to renege or to increase the transfer from future workers. Defined-contribution schemes have the political advantage of automatically reducing benefits when the economy does poorly.

Isn't a solution to defined benefit schemes just inflating the currency? That seems like an effectively equivalent way of passing (some of) the responsibility from the earners to the retirees.

Cost-of-living adjustments are pretty common, especially among state and municipal pension programs. Inflation does more to erode the purchasing power of nominal assets like bonds.

Another issue is guaranteeing returns. This is basically usury/interest, and is the main reason the financial system today is messed up beyond repair, unless someone is willing to step up and ban interest altogether.

The underlying problem is that, aside from hoarding canned food, consumption in the future must be produced by workers in the future. How do you make claims on the output of workers in the future? Pension funds buy up financial assets, so workers in the future will have to give money to the owners of those assets (old people) as interest payments on debt and corporate profits on the goods and service they buy. All of this is intermediated by the financial sector. Financial sector profits and executive compensation keep going up, which means less is left over for investors. The share going to the financial sector is increasing because they are winning the class struggle. One alternative is to bypass the financial sector completely, and simply give old people money and finance that with taxes. Social Security transfers a little under 5% of GDP from working people to old people, with very little overhead, independently of financial market tempests.

>Social Security transfers a little under 5% of GDP from working people to old people

And since it is capped at $132,900, the burden falls on working people and not on those making more. There is no reason for that cap to exist. In fact, that the ultra-wealthy aren't progressively taxed to fund Social Security ensures the burden falls entirely on people dependent on their labor for survival.

In theory, SS payouts to each individual are proportional to each individual's payments in. In that light what proper purpose is there in forcing higher wage earners to save more?

The relationship between average wages and SS benefits: those earning lower amounts receive a higher percentage of their wages as benefits, compared to those earning higher amounts. See [0].

Another way to view this is that there is a welfare component to Social Security. And then there is a component that is based on what you earn. This was the basic compromise when Social Security was created in the 1930s.

The upper limit to FICA (Federal Insurance Contributions Act) taxes on wages, is a way to downplay the welfare aspect of Social Security. Some people think we should acknowledge the welfare aspect and go ahead and tax all wages (like the US does for Medicare), but others don't think that's fair to high wage-earners.

[0] https://financialducksinarow.com/4414/social-security-income...

>aside from hoarding canned food

That's not true. A lot of non financial assets can last years or even decades:

Cars, houses, renovations, factories, inventory, household supplies (toilet paper, razor blades etc.), clothes, tools, durable goods, washing machines, stoves, furniture, some commodities (processed metals, wood, sand, gravel etc), building materials, public infrastructure, education, some food items (salt, sugar, rice, pasta ...).

If you know that the ratio of workers to consumers is dropping, it might make sense to promote investment in these things before workers become too scarce. Incidentally, low or negative interest rates promotes investment in these things.

Buying these things is a way for people to save and consume at the same time. During a recession, promoting spending in these categories is probably a good way to boost GDP without pushing people to draw down their savings too much. They can instead go from financial savings to physical savings.

Thanks, that's related to the point I was making, that it's completely normal for long-lived assets to have a negative rate of return (depreciation).

> Buying these things is a way for people to save and consume at the same time.

This is the myth that Baby Boomers have been fed. They've been told their home is worth $X but when they're ready to retire and the next generation can't afford to buy it they're going to suddenly be without the savings they've been banking on and we're all going to be in a boatload of trouble.

It doesn't have to have positive returns to be considered a saving. You buy a house, you get to live there rent free for decades even if you can't sell it for much at the end. That's still worth a lot.

I'm not really clear how it's rent free when you're making monthly mortgage payments? That seems rent free in name only.

We're talking about buying a house as a form of saving vs buying other financial assets. The part that you borrow is not savings. Only your home equity is savings. The part that the bank owns is not savings to you.

I am already worrying but so what? Sell everything and have all cash? And what then, wait for the "crash" to happen?

Sure the article gets clicks but in reality, if you have invested smartly and with a long-term outlook it shouldn't matter if the market took a momentary nosedive. Good companies remain good companies and I don't mind being invested in them even while my holdings go temporarily to perhaps negative.

One of the most annoying things as an investor I feel is the constant pressure to validate my investments to see if I should I sell them or not. It's just too much of a hassle and unless the company really does something dumb, I'll keep holding until the sun starts shining again. I'm not in a hurry either way as a young person, so time is on my side.

> I am already worrying but so what? Sell everything and have all cash? And what then, wait for the "crash" to happen?

Unless you can predict the crash / dip to with-in the day, dollar cost averaging and just hanging on for the ride is the best strategy:

* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...

Simply change the equity-bond allocation balance the closer you get to your retirement date.

All that shows is that dollar cost averaging has been better than the strawman he set up. 1. It might not be the case in the future. 2. There may be better strategies not explored. 3. It relies on the stability of the financial system and has extreme home country survivorship bias. Of course the richest country for the last 100 or so years is going to look like it has a stock market that can't loose.

In other words this look backward only, and beats the shit out of a lousy straw man.

> All that shows is that dollar cost averaging has been better than the strawman he set up.

What strawman? The "buying the dip" is a popular strategy that lots of people try to employ:

* https://www.thestreet.com/investing/earnings/when-to-buy-the...

* https://www.bloomberg.com/news/articles/2019-09-03/look-who-...

* https://www.nerdwallet.com/blog/investing/buying-the-dip-sto...

It explores two strategies that have are used by many people: yes there are others, but it simply does A/B testing to try to find the better of these two. It seems that DCA is better than buying the dip (BtD); that doesn't mean there's something better than DCA, but it says that DCA wins over BtD in this part of the bracket.

It looks at past data to build a model and makes future predictions: we can invest theoretical money and test the theory that DCA is better the BtD, and check back in a few years to see if the prediction is correct.

You’re right, I had assumed it was showing that dca is the best strategy.

> It seems that DCA is better than buying the dip (BtD)

Dca was better than BtD

The problem with some if this is that it frequently happens that strategies work the best right before they stop working without warning. It’s difficult to rule out that possibility.

Article is kind of silly, because you'd obviously be levered when playing any kind of non-momentum strategy (e.g. buying the dip), especially if you were actually omniscient, which would completely crush dollar-cost averaging.

> ... because you'd obviously be levered when playing any kind of non-momentum strategy ...

I think to underestimate the number of people who try to be clever with their (401k) retirement savings and who day trade as a hobby:

* https://www.thestreet.com/investing/earnings/when-to-buy-the...

* https://www.bloomberg.com/news/articles/2019-09-03/look-who-...

* https://www.nerdwallet.com/blog/investing/buying-the-dip-sto...

DCA assumes a large lump sum to invest, otherwise it’s simply a regular investment plan often linked to when you get your pay check.

If you have a lump sum to invest, DCA is simply a way to reduce variance often at the cost of higher transaction fees. I don’t understand why DCA is touted as anything special, if you have a long term outlook and no specific market knowledge just buying in one lump sum probably would have better EV than DCA.

Yes, DCA is technically breaking up large sum; compared to periodic payments:

* https://www.investopedia.com/terms/p/periodic-payment-plan.a...

* https://en.wikipedia.org/wiki/Dollar_cost_averaging#Confusio...

A good number of studies have shown that putting in a lump sum all-at-once gives better results most of the time.

The problem arises when people 'lose their nerve' when they read headlines about the market tanking, or recessions, or whatever. Market timing--trying to get out when things go down, and in again when they're up--is something that many people try to do:

* https://www.investopedia.com/articles/stocks/08/passive-acti...

There are all sorts of articles about "technical indicators" that one can use as a DIY investor to get out during bear markets. Or you can pay other people for their "expertise" by buying their actively managed funds.

The "DCA" comes in where people set aside money to invest, but do not issue a Buy because it's the 'wrong time' to invest: so the cash ends up sitting around, doing nothing much. But the article is arguing that trying to time the market (by buying the dip) is a fool's errand, and simply putting away a little every month into index funds (S&P, Russell) is the best thing most people can do.

One thing that a person could do with this information: if you were counting on your pension to last the rest of your life, you might postpone your retirement a few years.

Does that actually help with pensions? If the pension fund has problems, when 1 beneficiary delaying retirement wont make a noticeable difference. You might as well just retire and take what you can get while the fund is still paying out in full.

As an aside, before making an individual decision on what to do about your pension, look into what happens if it fails. At least in the US, private pension funds are insured.

I meant it more as, you may not be able to count on your pension, so work a few more years and save additional money for retirement.

Gold

I tend to follow Benjamin Graham's advice from The Intelligent Investor. Summarized by investopedia:

- Graham recommended distributing one's portfolio evenly between stocks and bonds as a way to preserve capital in market downturns while still achieving growth of capital through bond income. Remember, Graham's philosophy was first and foremost, to preserve capital, and then to try to make it grow. He suggested having 25% to 75% of your investments in bonds and varying this based on market conditions. This strategy had the added advantage of keeping investors from boredom, which leads to the temptation to participate in unprofitable trading (i.e. speculating).

I've been shifting over to bonds for a while now (currently sitting something like 70/30). Running the numbers on where I would have been if I hadn't started swinging towards bonds, I haven't missed out on much at all. The S&P is pretty flat since the January 2018 peak, and I'm in a safer position if a crash happens.

https://www.investopedia.com/articles/basics/07/grahamprinci...

It's still just timing the market with more steps. You may have done well the past two years but there are many other periods of uncertainty in which a large bond allocation would significantly underperform.

Bonds or bond funds? Those are two different beast with two different behaviors when crises hit.

A lot of people buy bond funds and think they own bonds. Bond funds can lose principal quite easily, bonds generally cannot, but are a pain to buy.

Anecdotally, you're the third person I hear talking about their savings recently and all of you have mentioned you think we are near a top and have been swinging your allocation from stocks to bond.

Now if this is a general trend, it would mean stock prices have been held back by people doing this transition and we might be due for a rebound.

I want to do these things but the 15% deduction for tax constantly scares me away. I guess I should assume that my equities are gonna drop 40+% so the 15% is easier to swallow?

If you're nearing retirement, push more towards bonds if concerned. If not, just let it ride. Your dividends, future contributions will buy into lower market prices.

The headline sounds worrying but the article is merely about technicalities of European pension regulations in light of low bond yields.

In a way europeans are reaping what they sowed

What has Europe sowed and what is it reaping?

And in on particular country - and I do know that one of the biggest UK pensions fund derisked years ago and sacked its mangers and went self managed.

The time to start worrying is long past. If you aren't worried yet then you've been ignoring the tell tale signs that are all over the business world. Safeguards instigated after the last close call are being relaxed, whole asset classes (including regular savings) are no longer viable and pensions are being cut while at the same time the age at which you get are eligible is being raised.

2008 wasn't the worst crisis ever, that doesn't mean we've seen the bottom of the pit yet.

If you are counting on others for your old age then maybe think again.

In such scenario you can't count on traditional investments either.

Traditional: stocks, bonds, savings, real estate. Some of those work, some don't and some of them are best avoided unless you plan on making a life around the theme of investing (and even then you will most likely get burned one day).

This isn't an article about pensions and retirement savings. It's an article about financial indicators, which pension funds, with their enormous amounts of funds under management, have a unique perspective on. Most of your comment isn't responsive to this article at all.

On the contrary. This is all about the 'solvability' demands on pension funds, which are driven to a large degree by computations involving future yields, which in turn depend on interest rates and other market indicators. The trends has been - for years - that the combined elements of demographic time bombs and historically low yields spell out that pension funds will likely not be able to fulfill their obligations.

So if you are going to depend on one of these for your future sustenance you need to re-do your homework or you may end up with a real problem in old age.

Prior to social security and pensions, people had kids to care for them in their old age. In order to do that, parents would save and the children would inherit the wealth they had created.

Now society is different. Older folks don't rely on children anymore, they rely on corporations and the government. They reverse mortgage their homes instead of leaving them to their children.

The family has broken down. Extrapolate that to communities. Companies. Friends.

Our society is broken for everyone but the wealthy in power and they don't want to help anyone else either.

> people had kids to care for them in their old age

Bringing kids in this world to take care of you when you are old is probably the most selfish thing you can do.

it is called evolution

edit: I appreciate your downvote but please read about evolutionary processes

Then humans have been selfish since time immemorial.

In many third world countries this is still the case. One of the biggest indicators of how wealthy a country is is to see what the average number of children per couple is. It's the first thing to drop once the feeling that the country will be able to deal responsibly with its elderly is established.

I don't think pension funds will full fill their obligations except that the Feds will pick up the slack minus some haircut. This happens all the time when a corporation wants to offload their pensions. It will happen with cities and state governments.. Ultimately the Fed will pay out.

Depends on what country you are in. I suspect a lot of old people will end up falling back on their children, like in the old days. Imagine if all of those baby boomers will live to 99. It will be quite an interesting societal change.

I think defined benefit schemes will be all changed to defined contributions schemes, for this reason - people live too long. Minimum retirement age will also keep getting adjusted. Most private sector pensions in the UK are already DC schemes.

The invested savings future retirees accrue in DB plans run out before the beneficiaries are 99, and those schemes will collapse unless bailed out.

Healthcare costs will also be a huge problem with extended life spans, unless technology miraculously guarantees healthy life until death.

Question would be: what would be a solid and reliable alternative that is also affordable by regular people? I hear "buy property or build a house" a lot, but that doesn't seem like an easy affordable alternative.

What works against the pension funds works to your advantage if you can leverage some funds. Depending on your location you may be able to leverage a relatively small amount of money (20-30%) to buy a property that will give you more than enough return to pay for the interest and the pay-off on the principal. You need to be relatively young for that to work though, if you are close to retirement age then this isn't going to generate enough yield compared to the sum invested.

To a student looking to go into quantative finance instead of data science, the number of negative finance headlines on the front page is worrying.

go into data science and dont look back.

On the contrary. The less predictable a future is, fear creeps in and the oxygen-deprived managers develope an urge to be surrounded with more Astrologers. Or the more socially plausible option - Mathematicians.

Negative finance headlines is a great positive indicator that nothing will happen. Almost no one can successfully predict a recession or downturn, and the more people believe it, the less likely it will be.

Do not give up on quant finance. Your longevity as a quant will be longer in finance than ‘data science’ whose value is quickly becoming diluted. Quants have been data scientists before the term was coined and will continue to be. My advice: do not get sucked into academic quant finance but become a practitioner by working for an investment firm or institutional investor. It will pay off.

Nobody "wants" another recession. We all read these articles, though, and then go on to spread them amongst peers like wild fire. The echo chamber only gets louder as time goes on. At some point those predictions/analyses become irreversible and de facto a self-fulfilling prophecy.

I've started refraining from talking about negative financial news with friends and family.

This is not about a recession. This is about fundamental shifts in financial market expectations (the exhaustion of growth, ~$17 trillion in bonds offered at negative interest rates, etc).

If your entire socioeconomic model is based on positive rates of return (retirement, pensions, investment income, etc), and you can no longer obtain those returns safely, things start to break down. Maybe the idea of retirement is an aberration in history if we're not going to provide for it through a transfer system. Maybe a dollar today is just as valuable as a dollar tomorrow, or ten years from now (time value of money). Do you save for retirement if you absolutely can never save enough due to the rate of return? Do you no longer care about all of that extra fiat (speaking about corporate finance) when its utility rapidly declines to near zero?

This is not constrained to just Europe. Look to both Japan, where the Bank of Japan owns a non-insignificant amount of the Nikkei, or the US where the Federal Reserve is already dropping rates again. This comes to every first world country eventually, the financial version of the Langoliers.

Until humanity is operating at its full economic potential, then money will continue to have time value, for it can be invested to increase economic potential. And if you think that humanity is operating at a fraction of its economic potential, even just given today's technologies, well, take a look at the world. The current state of sub-Saharan Africa comes to mind as an obvious counterexample.

"The exhaustion of growth" is political rhetoric meant to excuse anti-growth policy environments which actively suffocate growth by destroying incentives for growth and misallocating resources away from growth.

Interest rates of safe investments don't agree with your thesis. If there's growth to be captured, capital would rush to invest (and we see some dysfunction in that, like SoftBank's Vision fund, and we all know how that's turning out, throwing VC money into a dumpster fire of unprofitable ventures). Risk adjusted returns are an important metric.

There is a lot of growth left in the developing world, but the risk profile is drastically different than the first world.

There's plenty of growth to be captured, but its potential has been diverted into financialisation - which is essentially just moving money from middle and working class people to rich people - and away from physical invention and innovation.

The financial sector has eaten the last couple of generations of top mathematical talent, and there's almost nothing of lasting value to show for it.

With a more balanced economy we'd be further ahead in quantum computing, aerospace, AI, medical/bio tech, green tech, and education - all of which still have huge potential.

>Do you save for retirement if you absolutely can never save enough due to the rate of return?

I find this an interesting question because I turn around and look at the notion of multiple generations living together in the same household, as is practiced in some cultures. In that environment, if you can trust the next generation (or more specifically, your offspring) to care for you in your old age without necessarily banking on an annual 7% rate of return on financial investments, maybe you start putting more money and time into setting your children up for success instead.

If we follow this train of thought, then one might want to invest more into schools and other infrastructure to benefit the next generation rather than necessarily investing in high-yield funds, which strikes me as a healthier alternative in the long run, but would need to be localized to see sufficient return on that investment.

> If your entire socioeconomic model is based on positive rates of return (retirement, pensions, investment income, etc), and you can no longer obtain those returns safely, things start to break down.

Which is why most companies in the US have moved to 401k plans as assuming risk free rate of returns is ridiculous.

When I talk to family and friends, I assure them that everything will be great, and 4% year-over-year economic growth will continue from now until the heat death of the universe.

Is there any evidence that talking about a possible recession with your grandmother or uncle could actually cause a recession to happen? Are recessions like Tinker Bell, they only exist if you believe in them?

Have you ever heard about the Law of Attraction?

If everyone believes a recession is coming, they stop spending, causing a recession.

On the flipside, the economy can be stimulated merely by sentiment; if everything thinks things will get better, they invest and spend.

The concept is similar to the 'animal spirits' that Keynes spoke of.

Collective fear feeds a recession or depression. Banking panics are real and speculation of a prolonged recession of course deepens and lengthens it. FDR (in his 1933 inaugural address) certainly believed this to be true: "nothing to fear but fear itself."

Short-term fear can cause a sell off. You need long-term consistent fear to cause a recession (it's based on a quarter or year, depending on how you define it). You usually don't have consistent long-term fear without reason. It's usually the underlying problems that cause recessions. It's usually short-term fear that causes market crashes.

So much this. Every recession that I remember studying in my economics classes had an actual market failure acting as a trigger that caused widespread panic which resulted in a recession.

The 2018 us stock market downturn comes to mind as a panic that didn't result in a recession because there was no actual market failure causing actual economic harm outside of pure speculation.

For a country like the United States, recessions are at least somewhat like Tinker Bell. It's hard for external factors to seriously impact the US economy, as evidenced by the fact that growth is seriously slowing in China and several major EU nations are either in recession or very close to it, and the US economy is still growing. The major factors that influence the US economy are largely people's willingness to borrow, lend, and spend. If you can convince a large enough share of people that a recession is imminent it will actually happen as they pull their assets back from risky growth-fueling investments into low-risk low-growth investments. This will limit growth opportunities in the economy. If this gets bad enough it can impact the function of certain types of existing businesses that depend on capital markets for liquidity, and the economy can actually begin to contract.

For a country like the United States, recessions are at least somewhat like Tinker Bell. It's hard for external factors to seriously impact the US economy

Multiple trade wars precipitated by the current president certainly impact the US economy (and the global one). The coming global downturn will be almost entirely self-inflicted, but it won't be down to gossip about a possible recession, it'll be down to massive trade barriers imposed by fiat.

Trade wars are bad and hard to win.

We’ve been stacking tinder for a very long time with our monetary policy, as well as shifting demographics. The trade war might be the spark, but a spark on a clean forest floor doesn’t do much.

"It's hard" and "it's impossible" are very different beasts, and I said the former and not the latter. I think that the fact that the US economy is still growing despite disastrous trade policy and oncoming global downturn illustrates my point. Years of national and global scale economic mismanagement haven't yet managed to drive the US economy into recession. (Also, the Fed is pretty good at its job.) In comparison, during the financial crisis, issues with a particular asset class in the US economy within months causes a worldwide recession due to increased assessment of credit risk and corresponding tightening of lending that had to be mitigated with massive bailouts to prevent a death spiral.

As a further example, during the financial crisis many banks in perfectly healthy condition were forced to take bailouts so as not to inflame the perception that certain banks could not be trusted.

If nobody is having fun at a party, it's not a party. If enough people start having fun at a gathering, it becomes a party. So, mood matters. But once there's no more beer, game over. Objective reality also matters.

Actually, some investors do want a recession. You start by taking a hedge position that pays off massively in a downturn, and then try to bring it about by spreading doom and gloom.

No investor is big enough to cause a recession all by themselves. Or maybe some sovereign funds are, but they play by rules that don't allow manipulation. But when enough large investors think a recession might be coming, and they all take short positions and try to bring it about, it is more likely to happen.

This reminds of the .COM era when a lot of "experts" were calling for people to "keep believing" so things could keep going. The financial system should be based on hard facts and not sentiment. If the situation was stable then negative news shouldn't have much of an effect since the fundamentals are solid.

Wouldn't a distortion be damaging either way? If all the bulls tell us to keep believing beyond the hard numbers, then we'll end up with an economic fallout. If all the bears tell us its worse than it really is, we'll end up with a deeper and wider recession.

> If the situation was stable then negative news shouldn't have much of an effect since the fundamentals are solid

that's not how it works though, markets can be irrational and follow human emotions. Crisis can happen just because of unfounded panic.

I know this is not how it works. But telling people to not talk about negative things makes the market even less rational. I would argue that more negative talk would have slowed the build up of the .COM and real estate bubbles and avoided the following major crises.

No such thing, I'm afraid. How people spend their money is going to be based, in large part on sentiment at the end of the day. That old saying about the ability of "the market to remain irrational longer than you can remain solvent" has a lot of truth behind it.

At the very least it’s causing the dips to be a lot more dramatic lately. Everyone’s on edge and reacting wildly to minor indicators.

The nice thing is it creates a lot more opportunities to build profit in an overall flat market.

Nobody? Anybody with capital wants a recession, assets become cheaper, labor becomes cheaper, never let a good crisis go to waste and all that.

If you had $100 million in cash in 2008 you could buy up real estate for 10-20% off and be very comfortable waiting another 5-10 years for the property to appreciate.

Sentiment/Emotional based investing will get your face ripped off. As the old saying goes, Bulls make money, bears make money, pigs get slaughtered.

This recession had already started when the Fed started Quantitative Easing again. The Fed's balance sheet is twice as much as when it was doing QE1 back in '08.

The real unemployment rate is contained in U6. If this economy were so great, why is the unemployment rate at 6.9%? Why is the Fed doing QE again?

Burying your head in the sand won't change reality. Recession, market busts and depressions don't happen because people talk about it. It's just part of the cycle.

Think about this. Imagine 100% employment. 100% Sounds great right? Well, what will that mean for job reports the month after? 0% growth! 0 hiring. If there's 100% employment, what will that mean for pay? Pay will absolutely go up as workers are in immense demand. If pay goes up, what will that mean for the companies? Profits must come down than before! If profits are coming down, guess what? That's the beginning of recession. ... companies are going to cut back, etc, etc. This is really basic economics, the market is long term rational.

With that said, is a recession around the corner? Perhaps. People are spending a lot, wages haven't gone up much. Cost of health care, college education, cars have gone up more. Tons of zombie companies out there who should be dead but are alive because of easy money. Tons of money have been printed and injected into the economy because of quantitative easing. Rates are at an all time low. The Fed is bailing out banks on a short term daily basis to keep things running. Lots of capital can't find a safe spot to be invested in. Things are lining up. When will it happen? Who knows? maybe tomorrow, maybe 5 years. If anyone knew, they would be rich!

The "best-run" rating comes from the Melbourne Mercer Global Pension Index:

* http://www.mercer.com.au/globalpensionindex

* https://australiancentre.com.au/projects/melbourne-mercer-gl...

Technically Denmark is the second-best, with a score of 80.2 versus Netherlands' 80.3

The most worrying thing is that the media machine seems to want this recession to happen. It's madness. It's like they want to destroy the world's economy for their own short-term click metrics.

Recessions aren't due to how people feel. It's the freezing and culling of debt.

You stated that rather authoritatively but I'm not convinced there's any real consensus on the matter.

After all, why do people freeze / cull debt?

Because in non-negative interest world there's a limit on how much debt you can take?

I agree! But a person or business choosing whether to take on more debt is going to rely on just the cold calculus of income and outgoings?

I believe that how take into account how secure they feel in their job, whether everyone else seems to be panicking about the economy, housing fomo, etc.

It was the same way in 2012.. 2009.. it's always been this way. A recession is two quarters of negative GDP. What you really are concerned about is a depression. I don't see that happening in any shape or form.

https://outline.com/Jr68vZ

European pensions may be well run but they are hugely under exposed to venture and tech overall so I'm skeptical of them crying wolf about the tech industry when they have so little exposure to it.

Are American pension funds particularly exposed to venture? My understanding of this industry comes almost entirely from the Kauffman report, which I'm sure is very dated, but that understanding is that venture as an asset class is just a small slice, and invested in primarily because of asset manager requirements to look for un-correlated assets.

If that were true, that wouldn't be an argument that a collapse in tech wouldn't be a systemic failure, because of course all sorts of other actors are connected to tech.

And then the ECB calls all the debt, gutting all Europe based corporate borrowers for actual assets on ECB balance sheet

And then Germany seizes ECB

Germany finally wins European Single Market, and predictably steers productivity as their culture was already optimized to do

One thing I have learned is that when it comes to mass media articles the best bet is to always do the opposite they are saying. Like "George" in Seinfeld, they are most of the time wrong, thus doing the opposite is right.

to me what is worrying is not that pension funds are crying about trouble (although it may end sadly for those to be covered)

what is worrying is that people keep the current economical system which creates the need for pension funds.

if all immobilia were rent only, and the rent was continuously redistributed per capita to the population, then everyone would enjoy the average rent:

housing: everyone sleeps somewhere and the total expenditure on housing is fairly redistributed,

food: everyone eats something and the farmers use the bulk of their income to rent the land, so the population gets a significant fraction of their food payed back

energy: wind and solar take up space, competing with farms and housing, and the energy companies spend the bulk of their income on renting that land

ecology: we can democratically agree to leave a fraction F for nature of different degrees of wildness, and only put up the the rest for human rent

in such a world, why do I need a pension fund? when I am old and less mobile, I can be satisfied with smaller housing, less transportation to compensate for my probable inability to work. If you look at how elderly are [mal]treated in elderly homes etc, I would prefer to be in control of my fair share of average rent, so that if I don't like a place I can go rent somewhere else. Instead of having to gamble today if insurance company X will be solvent in the future, or even if it is, if the resulting pension will even cover for food, housing, ... while with average rent, while the average rent does not devalue with respect to the average rent other people receive...

why would I need health insurance? in the current world I would need it because of unexpected lump payments to hospitals etc, but in the system of average rent (under correct compliant conditions), I could set up a standard smart contract for health: "if you treat me now, part of my future income will be diverted for a duration long enough to cover the medical bill", or I can choose to disagree at the moment itself! The current system requires you to predict in advance for all possible medical urgencies, and across all available treatments if you agree on average. There are situations where I would decide against a certain proposed treatment, with another treatment not being covered. But then why did I pay medical insurance for the last X years?? With a system of average rent, your expense is a free trade at the moment it arises and you are capable of consulting your feelings about a certain proposal, instead of having to guess in advance if you will like what is compatible with your insurance plan...

> what is worrying is that people keep the current economical system which creates the need for pension funds

Exactly. And what is worrying is that your comment (laying at the bottom of the page) is the only one so far talking about solving the problem by thinking out of the box.

I'd be even more free to mention a money-less world, or resource based economy as a solution, but people are too deep into this system to even comprehend that idea, let alone believe in it.

Edit: Related article: https://news.ycombinator.com/item?id=21173493

Does anyone know how to bypass Bloomberg's paywall?

https://outline.com/Jr68vZ

https://github.com/iamadamdev/bypass-paywalls-firefox

Posted just the other day here by another user

Disclaimer: i haven't used it

https://github.com/iamadamdev/bypass-paywalls-firefox

Simply disable JS or use Firefox's Reader Mode.

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